Homework Answers
Answer to the above question is Option d (i.e Debt Equity Ratio can be used to interpret the information regarding all the 3 options so given in the question)
Explanation:
DEBT EQUITY RATIO is a capital structure ratio which evaluates the long-term financial stability of business. Higher DE Ratio would mean that owners can retain control over their business with limited capital thereby suggest LONG TERM STABILITY.
Debt Equity Ratio = Long Term Debt/Equity Shareholder's Fund. Higher the Debt Equity Ratio would mean:
a) more interference by the lenders (because of their higher stake)
b) owner will have fewer chances of borrowing further in the case of urgent requirement.
c) Higher interest payment which in turn will keep the profit under pressure and higher risk to the money.
Above suggest the degree of risk in using Debt Financing.
The debt equity ratio also suggest the claim of the creditors and owners over the assets of the company.
If the value of the assets of the company declines, it is a risk to the money of both shareholders and creditors.
Hence, DE Ratio reflects the margin of safety to the creditors in the event of Liquidation
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4. Debt (or financial leverage) management ratios Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds. Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: O a company with no financial leverage, or an unleveraged company O a company with financial leverage, or a...
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Using the financial ratios provided in Table 4.1 and the financial statement infor- mation presented below for Costco Wholesale Corporation, calculate the follow ing ratios for Costco for both 2013 and 2014: a. Gross profit margin b. Operating profit margin c. Net profit margin d. Times-interest-earned (or coverage) ratio e. Return on stockholders' equity 1. 1 f. Return on assets g. Debt-to-equity ratio h. Days of inventory . Inventory turnover ratio j. Average collection period Based on these ratios, did...
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I need help figuring out how to calculate cost of debt and
equity.
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